International Business Machines (IBM) is a multinational public limited company which deals with technology within the diversified computer system industry. The firm operates on a global scale with its headquarters located at Armonk, New York in the United States. In its operation, the firm has managed to become the global leader in terms of providing various information technologies. The firm has a human resource base of 388,000 employees. The firm specializes in manufacturing and development of diverse information technology products and its operations are divided into various segments with each segment specializing in different activities (Palmisano, 2008, p. 4).
The firms’ global technology services sector deals with the provision of various business processes and information technology services. Some of these services include integrated technology, maintenance, outsourcing and business transformation outsourcing. The Global Business Segment (GBS) segment deals with the provision of various professional and outsourcing services such as consulting, application management and system integration. On the other hand, the System and Technology section specializes in the production and development of various storage and computing devices. Some of the storage devices include disks, tape storage systems, software, servers, semiconductor technology and packaging solutions. In addition, this segment also specializes in the provision of retail store solutions and technology and engineering services. The software segment deals with development of various operating systems and middleware technologies. Some of the key software developed by this segment includes information management software, web-enabled applications, content management, business intelligence software and WebSphere software (Palmisano, 2008, p. 7).
The firm also provides a number of commercial financing services through its financial services segment. IBM’s commercial financing services are specifically designed for information technology products dealers and re-marketers. In addition, the segment provides lease and loan services to other clients. The firm provides its services to both individual and institutional customers. The firm has had superior performance over the years. During the financial year which ended 30th June 2009, the firm’s net income averaged $5.4 billion which represents an increment from its previous $5.1 billion level in 2008. The firm’s earnings per share (diluted) increased from $ 3.61 in 2008 to $4.02 in 2009 which represents an increment of 11%. During 2009, the firm’s operations were affected by the economic recession resulting in a reduction in the firm’s financial performance. For instance, the firm’s sales revenue during 2009 dropped to $45 billion from $51.3 billion in 2008. This represents a reduction with a margin of 12%. This paper entails a report on the operation of IBM (Palmisano, 2008, p. 9).
The objective of the report is to evaluate IBM’s optimal operation strategies with specific reference to its pricing and resource utilization strategies that affect the value of the firm.
The report entails identification and analysis of IBM’s organization and management models. The firm’s organization consists of sales and distribution, intellectual property, research and development and integrated operations. On the other hand, management models consist of demand and business models. A competitor analysis is conducted by considering the firm’s key competitors. Competitor analysis is conducted through incorporation of Competitor Profile Matrix (CPM). In addition, various critical success factors are rated. In conducting market analysis, the strengths, weaknesses, opportunities and threats are identified and analyzed through the SWOT analysis model. The extent of the industry regulation is also analyzed. IBM’s pricing, capital structure and budgeting and risk management strategies are identified. Finally the conclusion and a number of recommendations are given.
IBM’s Organization and management model
It is paramount for firms operating on a global scale to ensure that they adopt effective organization in their operation. This will contribute towards the firm positioning itself optimally in the market. In its operation, the management team of IBM has managed to attain this. According to IBM management discussion: worldwide organizations (2008, p.1), IBM’s operations are organized into 3 key organizations which have contributed significantly towards the firm’s success in the global market. Through these organizations, the firm has managed to deliver high value to its clients. These include integrated operations, sales and distribution and intellectual property and research and development.
Sales and distribution
According to Chhatwal, Raj and Nair (2003, p.20) effective distribution plays a significant role in the firm attaining its profit maximization objective. This is due to the fact that distribution enables a firm to cover a large market. According to Mao (2003, p.1) effective distribution plays a significant role towards the firm attaining its profit maximization goal. This is due to the fact that the firm’s supply chain is enhanced. Through this organization, IBM has managed to effectively penetrate 170 countries within the global market. This has been achieved through establishment of units within all the countries in which the firm operates. All the units are dedicated to ensuring that the value is delivered to the customers. This has been made possible through effective staffing of the units. For instance, the units have professionals who work with association of product specialists, delivery fulfillment teams and consultants. In their operation, these teams ensure that they first understand the needs of their customers. As a result, the teams are able to work together in finding a solution for their clients through combining their global expertise with the local experience. According to IBM management discussion: worldwide organizations (2008, p.1), the firm has adopted a geographic structure that enables the firm to focus on the local clients. Geographic focus enables the firm to be proactive in identifying and exploiting new market opportunities. To ensure a high level of efficiency in its operation, IBM ensures that it aligns its resource utilization with the clients’ needs. This has contributed to the firm’s efficiency in utilizing its resources.
Intellectual property, research and development
Through research and development, IBM has managed to differentiate its products from those of its competitors. This has been achieved through incorporation of continuous research and development in its operation. The firm has superior human capital which enables efficient decision-making with regard to resource utilization in its research and development process. The firm incurs approximately $6 billion annually in research and development. Its research and development are in line with its 2005 business model (that is circa 2005 model). The model entails strategic investment in high-growth and high-value market opportunities. Its numerous innovations enable the firm to easily patent its products. As a result of investment in research and development, IBM manages to make an annual income of $1 billion in terms of intellectual property.
In its global operation, IBM has managed to incorporate the concept of integration. This has enabled the firm to position itself optimally in the market through utilization of better capabilities and economics. Global integration has also enabled the firm to eliminate redundancies that were created over the years in its growth phase. Integrating its operation has been achieved by ensuring that all its operations are based on the right determination of the cost, skills and creation of a good working environment. In addition, the firm has been able to create a good relationship with its business partners such as suppliers and clients. Through the Integrated Technology Delivery (ITD), IBM has managed to link all its global service delivery operations to ensure cost efficiency in its strategic outsourcing.
Various models are utilized in the management of IBM. These models have incorporated various components which include business, industry, computing and marketplace (IBM Corporation: case analysis, 2005, P.20). The firm’s business model entails the firm’s commitment to its employees and the society in which it operates. In addition, the firm’s business model also consists of demand model which enables the firm to be responsive to changes in labor, demand and supply, pricing and competition. The model also enables the firm to be flexible by adapting variable cost structures. The firm’s 2005 on-demand business model is an improvement of its 2003 electronic commerce on-demand model. The concept of flexibility has also been integrated into the firm’s productivity, capital and finance management (IBM Corporation: case analysis, 2005, p.20).
Competitor and market analysis
Over the years, business environment has proved to be very challenging due to an increment in the level of competition. According to Salvatore (2006, p. 400), market structure is one of the determinants of competition within a given industry. Information technology industry is characterized by a monopolistic market structure. This arises from the fact that there are a large number of producers who produce similar but differentiated products (Collins, 2009, p.56). As a result, the intensity of competition amongst firms is relatively high. According to Varian (2001, Para. 5), high technology industries such as information technology are able to integrate price discrimination in their operation. This is due to the fact that they are able to manufacture and develop personalized products and services.
In its operation, IBM faces stiff competition from three key firms which include Microsoft Corporation, Hewlett-Packard Company, and Accenture public limited company. The table below illustrates a competitor analysis with reference to financial position.
|Quarterly revenue growth (%)||0.80||-11.20||-7.90||14.40|
|Earnings before interest and tax||23.26||3.32||15.80||24.43|
|Operating margin (%).||19.00||12.59||9.62||37.64|
|Earning per share||10.008||2.375||3.143||1.815|
|Price earning ratio||12.36||16.96||15.47||15.49|
The intensity of competition within the information technology industry is being increased by an increment in the number of mergers and acquisitions being undertaken. As a result, firms are competing to attain a high market share. According to a report by Gartner, IBM was classified as the market leader in Information Technology (IT) services with a market share of 7.2%. On the other hand, Accenture, Microsoft, Hewlett-Packard had market shares of 2.8% 3.8 %, 2.3 % respectively (Wagner, 2008, Para. 5). IBM’S success within the industry is associated with its effective integration of critical success factors which include high-quality products, product customization, financial strength, geographical coverage and human capital. The table below gives a rating of the critical success factors.
|Critical success factor||IBM||Accenture Plc||Microsoft Corporation||Hewlett-Packard|
|Research and development||5||3||4||3|
From the table above, it is evident that IBM is well-positioned in market with a rating of 28 compared to Microsoft which has a rating of 25. The table below illustrates IBM’s SWOT analysis.
|The firm has a strong managerial and technical staff. The firm’s workforce is well educated (IBM Corporation: case analysis, 2005, p.84).||Reduction in the number of developers equipped with mainframe skills (IBM Corporation: case analysis, 2005, p.35). |
-Difficulty in forming mergers and acquisitions due to differences in managerial styles.
|High probability of market growth due to emerging markets segments such as healthcare, consumer products, travel and transportation and small and medium enterprises (Watson, 1998, Para. 6).||Increase in competition due to formation of mergers and acquisitions, formation of startups and revival of information technology venture capitalist. This will result in a reduction of the firm’s market share.|
|Incorporation of global integration strategy in all its operations. This has enabled the firm to form a unit global system. The firm has established global delivery centers in countries with the largest population such as China, India, Russia and Brazil.||Failure to accept international agreements and standards stipulated by various international bodies such as UN, ISO CSR and Inco Terms.||High growth potential through innovation of data security technologies.||Risk of terrorist attacks which is focusing on major institutions.|
|High level of operational efficiency has enabled the firm to reduce cost of operation, speedier procurement||Infringement of intellectual property and copyrights. For instance, in 2004, IBM provided 500 software to individuals working in all its open-source projects.||High probability of success upon the firm shifting its operation from being products based to solution-based.||Fluctuations in the value of the dollar due to financial crisis. This will have the effect of increasing the cost of the firm’s investment in research and development.|
Product and services pricing strategies
According to Mao (2003, p. 6), effectiveness in development of pricing strategy can greatly contribute towards a firm’s success. Firm’s management teams should ensure that the pricing strategies are developed to deliver the intended value. This can be attained by setting the price in a way that reflects the effect of price changes on both the firm and customers. According to Portal (Anon., 2009), pricing strategies pose a challenge to management teams of firms that deal with provision of IT services. In setting the price for products and services, the management teams of IT services firms intend to achieve a number of objectives. These include attainment of the desired margins, meeting competition and covering their cost of production. IBM has integrated various pricing strategies such as business value pricing and cost-plus pricing in setting the price of its products and services. Cost-plus pricing enables the firm to set incorporate the cost involved in their manufacture and the intended margin. As a result, the firm’s products and services are priced optimally. On the other hand, business value pricing enables the firm to base its costs on a defined metric that is quantifiable and important in the course of its operation. This method enables the firm to easily adjust the price to incorporate market changes (Westcott & Goransson, 2006, p. 24). Through effective pricing, the firm has been able to cope with the competitive environment.
Deregulation of IT industry
Increase in the rate of globalization is culminating in an increment in the rate at which countries are deregulating various industries. One of the industries which are witnessing increased deregulation is the information technology (Carmel, 2000, Para. 3). As a result, more investors are able to venture into various industries. Increased economic liberalization is culminating in an increment in foreign direct investments being conducted within US information technology industry. However, the US government has increased its control on the quality of the information technology products manufactured by the firms.
Firms are faced with diverse risks in their operation which affect their financial position. One of the major risks which pose a threat to operation firms is market risk such as interest and currency rate fluctuations (Management discussion; market risk, 2007, Para. 5). To deal with this challenge, it is paramount for firm’s management teams to incorporate risk management in their strategic management process. In its operation, the management team of IBM conducts continuous risk assessment, establishes policies and strategies aimed at protecting the firm against adverse effects of risk. For instance, in managing risk associated with fluctuation of interest and current rates, IBM uses various financial instruments especially derivatives.
Considering the fact that IBM operates with multiple currencies and utilizes debt finance as a major source of its finance, the firm is faced with high-risk interest and currency rates movements. The firm uses derivatives to align the risks associated with interest rate movement with the firm’s lease and other debt financing instruments. In addition, derivatives are used to manage risk associated with currency fluctuations. However, increased utilization of derivatives to hedge against market risk exposes the firm to risks associated with derivative contracts. This is because there is a probability of the derivative contract failing. To mitigate the effect of these risks, IBM’s management has formulated a number of policies that entail effective selection of the parties to the contract. This is conducted by analyzing the credit rating of the parties to the contract. In addition, the firm maintains strict limits and terms which are in line with the individual party’s credit rating.
The firm is also faced with equity risk resulting from movement of market price. According to Benhamou (n.d, p. 1), equity risk is linked to employees’ obligations. To hedge against this risk, IBM utilizes equity derivatives such as futures and equity swaps. This enables the firm to hedge to a certain degree risks associated with employee compensation obligations.
IBM holds various warrants which are associated with the firm’s investment. These warrants are considered to be derivatives since they have the element of net share settlement provisions. As a result, the firm is faced with credit risk. According to Benhamou (n.d, p. 2), credit risk relates to failure of one of the parties to the contract to act according to the provisions of the contract. According to notes to consolidated financial statements (Anon., 2009), the firm uses credit default swaps to hedge against this risk exposure. In addition, the firm utilizes various option and forward contracts to hedge against the risk of foreign market exposure.
The firm also conducts sensitivity analysis in managing the market risk. According to Kleijnen (1993, p. 4) sensitivity analysis enables the firm to quantify the effect of changes in certain variables on other parameters. Through sensitivity analysis, IBM is able to determine the loss resulting from reduction in fair values of the market instruments which are sensitive to market changes such as fluctuation in exchange and interest rate.
Capital structure and budgeting
According to Kennon (2009, Para. 4), capital structure is defined as the composition of capital in a given firm which consists of either debt or equity capital. Equity capital refers to the amount of money invested by individual or institutional investors in an organization. This component also entails a firm’s retained earnings. On the other hand, debt capital refers to capital that is sourced from external sources such as in form of bank loans (Kennon, 2009, Para. 4). IBM’s capital structure is composed of both debt and equity capital. During its 2009 financial year, the firm had total debt capital of $29.4 billion from global financing which is a reduction from its 2008 level of $ 33.9 billion. As a result, the firm’s debt to equity ratio settled at 6.9 to 1. On the other hand, the firm’s debt from non-global financing was $ 6.6 billion which represents a decline with a margin of $3.0 billion. As a result, the firm’s debt to capitalization ratio was reduced with a margin of 35% from 48.7% (Quarterly earnings, 2009, Para. 7).
In their operation, it is paramount for firms to conduct capital budgeting in selecting the projects to invest in (Madumathi, n.d, p.1). According to Gulesian (2006, para.1), this enables management teams to make optimal investment decisions on which firms to consider in their capital budget. Capital budgeting entails determination of the present value of future cash flows resulting from the investment. Various methods are utilized in conducting capital budgeting. These include the use of profitability index, net present value (NPV), and internal rate of return. In its operation, IBM utilizes all the methods in determining its investment decision. Through the payback method, the firm is able to acquire information related to risk and liquidity of its projects. On the other hand, NPV enables the firm to conduct an analysis of the expected returns to the shareholders and hence determine how the firm will grow. In its research and development decisions, the firm integrates Discounted Cash Flow (DCF) and decision tree analysis methods (Brown, 2006, Para. 10).
IBM has managed to attain an optimal position within the diversified computer system industry. This is evident from the fact that the firm deals with production and manufacturing of diverse information technology products. In addition, the firm offers a number of services to both individual and institutional customers. The firm’s success has resulted from incorporation of effective managerial concepts. For instance, the firm has adopted a superior organization and management model which enables the firm to penetrate the entire global market efficiently. The firm’s organization model entails sales and distribution, intellectual property and research and development and integrated operations. On the other hand, its management model incorporates two main elements which include business and demand models. Through these models, the firm is able to meet the market requirements more effectively.
In its operation IBM faces numerous challenges from the external environment. Most of these challenges result from both the external and internal environment. Some of these challenges relate to increased competition and market risks. Some of the firm’s major competitors include Microsoft, Hewlett-Packard and Accenture. Through the effective formulation of pricing strategies, IBM has been able to cope with the competitive environment. In addition, IBM has incorporated effective risk management strategies which enable it to hedge against the various market risks. The firm’s capital structure is composed of both debt and equity capital. This enables the firm to finance its projects sufficiently. Capital budgeting techniques have enabled the firm to be effective in selecting the projects to invest in.
To improve on its market position, the management of IBM should consider the following recommendations.
- Integrate a continuous training program for its human capital to ensure effectiveness in its innovation process.
- Consider forming mergers and acquisitions as an expansion strategy with firms that have close or similar management styles.
- Conducting continuous market analysis to identify potential and trends in market risks. This will enable the firm to be proactive in formulating risk mitigation policies and procedures.
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